Security Tokens-The Future Of Portfolio Diversification

Emerging opportunities for mitigating market volatility

As asset classes are evolving it is vital that investors understand the emerging opportunities for portfolio stability while still hedging against market volatility. Traditionally precious metals have represented a defensive position for investment during a crisis. The development of metal-backed security tokens are bringing new opportunities to traditional markets.

We are beginning to see the emergence of new instruments to bridge the gap between digital tokens and traditional assets such as gold and silver. Understanding the opportunities these emerging technologies represent is key for savvy investors to capitalize on and benefit from portfolio diversification.

“Risk is like fire: If controlled it will help you; if uncontrolled it will rise up and destroy you.” — Theodore Roosevelt

The Growth Of Crypto-assets

Crypto-assets represent both emerging opportunities and risks for investors. Contributing to the volatility of crypto markets is the added uncertainty regarding their legal regulations. Globally regulators are beginning to formalize their positions and countries such as Luxembourg are aggressively pursuing legislation for block-chain technology markets. Conversely other territories seem to be prevaricating on how best to approach the issue and this has implications for investors.

The global market for crypto-assets has diversified beyond crypto-currencies, bringing new and innovative instruments to the fore. Core to understanding these opportunities is identifying the differences between utility tokens and security tokens. Utility tokens represent access to future products or services offered by an organization. Security tokens are different as they represent digital assets that derive their value from more traditional stores of value such as physical goods, like precious metals.

Security tokens have some characteristics of traditional securities like bonds, stocks and options. However, they bring enhanced value through the benefits of the block-chain such as ceaseless global trading and greater accountability.

Trading in traditional securities mandates responsibility on the part of the vendor to adhere to regulations intended to provide investors with security, ensuring their rights are appropriately represented. This point is essential to differentiating security tokens from utility tokens because if vendors do not comply with the legal frameworks for securities the security of investors could be compromised. Loss of investor confidence has the potential to erode global adoption of security tokens.

Hedging Against Volatility With Precious Metals

Gold has been traditionally considered a store of value for several key reasons. Firstly, the supply of gold has always been comparatively limited. This scarcity combined with the cost of extracting the metal and the increasing global population means that the quantity of gold per person is relatively small. Although gold is almost indestructible some estimates put the total amount of gold above ground at only around 193,472 tonnes.

Traditionally gold has been valued for its visual appeal and durability but other inherent factors contribute to making it a useful store of value. Gold can be beaten wafer thin down to sheets that are only a few atoms thick and is the most malleable of all the metals.

As the technological age arrived further uses for gold emerged through understanding its benefits for engineering, such as gold’s ability to conduct electrical current. Ancient cultures believed that gold, which is formed through the collision of stars, had positive health implications.

These fundamental characteristics have contributed to gold’s value throughout the ages and that value is still globally recognized today. The United States Dollar was once backed by gold until president Nixon removed it from the gold standard in 1971. The control of gold reserves is a delicate global issue that the public is generally uninformed about.

All these factors ensure that the demand for gold and therefore its ability to hedge against market fluctuations will remain strong into the future. Silver has similar value propositions to gold although the volume of silver is far greater and it represents different health and industrial properties.

In essence both gold and silver can be used to hedge against long term market volatility because of their innate value.

Tokenizing Precious Metals

In the midst of a rapidly developing market for crypto-assets and increasing global demand for gold and silver, security tokens are emerging to bridge the gap between the benefits of physical ownership and the opportunities of block-chain technology.

Although there are clear benefits to diversifying portfolios with gold and silver there are issues associated with the storage and trading of precious metals. Even though some cultures still adhere to the traditional view that precious metals should be held in the hand for emergencies, there seems to be less gold currently stored at home than in previous generations.

Keeping precious metals in private residences has security implications because it can be stolen during burglaries and endangers the holder should the stockpile become discovered. At the same time there is risk associated with depositing precious metals with a broker in exchange for paper receipts. During an economic crisis there is no guarantee that those receipts will be honored. A further issue is that trading of precious metals in any physical location is limited by the opening times of the market.

Security tokens that are backed by precious metals are filling the gap between security and transact-ability. Physical assets stored in a central location provide enhanced security. The accountability of ownership combined with the ability to trade freely across the globe brings greater liquidity and flexibility for investors.

The Future Of Portfolio Diversification

The innovation of metal backed security tokens are bringing to market new opportunities for investors to hedge against market volatility using traditionally recognized asset classes. Volatile markets need trusted assets to provide a hedge for maintaining value. The issues traditionally associated with physical precious metals are partially mitigated through the accountability and flexibility derived from instruments such as gold and silver digital security tokens.

In many ways block-chain technologies are delivering an enhanced value for vendors, purchasers and the market as a whole. The vendor is able to realize liquidity on previously illiquid assets to fund growth. Purchasers are able to access physical precious metals at discounted rates while having the security of centralized storage and uniquely identifiable tokens. The entire market benefits from increased trading volume backed by the accountability and security afforded by the block-chain.

With such positive attributes it seems clear that gold and silver backed digital security tokens are providing the market with the opportunity to hedge investments through precious metals while still retaining the benefits of globalized, decentralized technology.

It is very likely that we will see further instruments of this kind being offered to investors in the near future. The benefits have the potential to be golden!

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